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Willis ILS Report: Sandy Impact Likely to be Muted

The impact of Hurricane Sandy on the catastrophe bond market is likely to be muted based on current estimates, with little impact on new pricing, according to Willis Capital Markets & Advisory (WCMA), part of global insurance broker, Willis Group Holdings. The scope and scale of the storm makes it unlikely that any bonds will be triggered solely by Sandy; however if losses mount and early estimates prove wrong, some bonds could be at risk.

Some commentators believe that the significant business interruption and demand surge/loss amplification component to the event could trigger greater losses than those currently estimated.

The latest Insurance-Linked Securities (ILS) Market Update from WCMA, ‘Spreads Continue to Tighten as Sandy Impact Is Assessed' reports that there were three new catastrophe bonds issued in the third quarter of 2012 totalling $525 million, down slightly from four transactions totalling $676 million in the same period a year earlier. Total non-life issuance for the first three quarters of 2012 to date is now $4 billion, up from $2.3 billion for the first three quarters of 2011.

Commenting on the outlook for the market, Bill Dubinsky, Head of ILS at WCMA, said: "The third quarter is typically a quiet period for new catastrophe bond issuance and 2012 was no exception. But in the short-term, the market outlook is very positive. Spreads have tightened in the primary and secondary markets since the late second quarter and there has been strong investor demand and successful execution at the lower end of pricing guidance. Our forecast for total 2012 issuance remains in the $5.5 billion to $6 billion range.

"Based on initial loss estimates from modelling firms, we believe that Hurricane Sandy will have little if any impact on new issue pricing in the catastrophe bond market, especially outside the U.S. Of course, if losses mount and early estimates prove wrong, some bonds could be at risk.

"Over time we expect the catastrophe bond market will expand to encompass more risks and shift towards a greater acceptance of indemnity triggered structures. However, we expect more rapid growth will continue to be observed in simpler, private collateralized reinsurance transactions."

This quarter's report also features an interview with Dan Hogan, Vice President in The Hartford's Enterprise Risk Management department.

Commenting on the attractions and potential of the ILS market, Hogan says: "Two attributes of the ILS market are especially attractive to sponsors: it provides fully collateralized cover, which is especially valuable when purchasing protection for large industry loss events, and offers multiyear protection, which allows sponsors to better manage the risk of post-event disruptions in reinsurance market capacity and pricing.

"I think it would be a positive development for the ILS market if it could expand to cover additional perils; wind and earthquake covers obviously dominate the market today."

According to the report, catastrophe bond issuance in the final quarter of 2012 is expected to be strong. For the past two years, fourth quarter issuance has been approximately $2 billion.

Willis Capital Markets & Advisory, with offices in New York and London, provides advice to insurance and reinsurance companies on a broad array of merger and acquisition transactions as well as capital markets products such as insurance-linked securities. Nothing in this communication constitutes any legal or financial advice or an offer or solicitation to sell or purchase any securities.

Willis Group Holdings plc is a leading global insurance broker. Through its subsidiaries, Willis develops and delivers professional insurance, reinsurance, risk management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around the world. Willis has more than 400 offices in nearly 120 countries, with a global team of approximately 17,000 employees serving clients in virtually every part of the world. Additional information on Willis may be found at www.willis.com.